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Monday, 7 August 2017

After months of stagnation the market has shown marginal signs of improvement amidst support from global supply squeeze, Chinese demand and weakening Dollar. Disruptions to copper shipments from Canada and Chile have undermined expectations for rising global copper supplies in the second half of the year, cutting the fees that smelters charge miners to process metal. Moreover, An estimated 5,000 workers at the giant Grasberg copper mine operated by Freeport-McMoRan Inc's Indonesian unit will extend their strike for a fourth month in a dispute over layoffs and employment terms. Growth in China's services sector slowed in July, a survey showed on recently, but data earlier showed that the manufacturing grew strongly, underpinning demand for metals. Expectations of stronger demand from Chinese stainless steel mills and concerns over supplies from top nickel ore exporter the Philippines have boosted the metal. The weaker dollar is another big tailwind for the industrial metal. The dollar index was down 2.9 percent in July, and copper futures for September were up 6.7 percent for the month. The U.S. dollar laboured at a 13-month low against a basket of currencies, making dollar-denominated commodities cheaper for holders of other currencies and potentially boosting demand.

The in-depth analysis of the supply disruptions could be adhered to the continued strikes in major copper mines across the world. Unionized workers at mines in Peru, the world's second biggest copper producer, started a nationwide strike in Later half of July 2017 to protest the government's proposed labor reforms. The stoppage has likely curbed copper production at some of the country's largest mines, including BHP Billiton Plc's, Glencore Plc's Antamina, Freeport-McMoRan Inc's Cerro Verde, Southern Copper Corp's Cuajone and Toquepala. Zaldívar, an open-pit, heap-leach mine, produced 102,000 tonnes of copper in 2016. During the first quarter operator Antofagasta said production rose 7.3% to 26,600 tonnesWorkers at the Zaldívar copper mine in Chile signed a three-year wage deal with operator Antofagasta, the union confirmed. Chile is responsible for some 30% of global output. The world's largest copper mine Escondida was hit by a 43-day strike in February-March this year that crimped production by around 120,000 tonnes. The Chile’s Caserones mine, which has been behind schedule ever since it began producing in May 2014, had to halt operations for three weeks following a blackout caused by heavy snow and rain in May 2017. It’s been trying to get back on track since then.

On the supply side, World mine production is estimated to have declined by around 3.5 per cent in the first four months of 2017, with concentrate production declining by around 3 per cent and solvent extraction-electro-winning (SX-EW) declining by around 5 per cent. The decline in world mine production was mainly due to a 12 per cent decline in production in Chile, the world’s biggest copper mine producing country, negatively affected by the strike at Escondida mine and lower output from Codelco mines, a decline in Canada and Mongolia concentrates production of 19 per cent and 22 per cent, respectively, mainly due to lower grades in planned mining sequencing and a 14 per cent decline in Indonesian concentrate production as output was constrained by a temporary ban on concentrate exports that started in January and ended in April. However, overall decline was partially offset by a 13 per cent and 7 per cent rise in Mexican (concentrate and SX-EW) and Peruvian (concentrate) output, respectively, with both countries benefitting from new and expanded capacity that was not yet fully available in the same period of last year. On a regional basis, production rose by 4 per cent in Europe (including Russia) and 7 per cent in Oceania while declining by 6 per cent in the Americas, 1.5 per cent in Asia and 4 per cent in Africa. World refined production is estimated to have remained essentially unchanged in the first four months of 2017 with primary production (electrolytic and electro-winning) declining by 2 per cent and secondary production (from scrap) increasing by 12 per cent. Increased availability of scrap allowed world secondary refined production to increase, notably in China. The main contributor to growth in world refined production was China (increase of 6.5 per cent), followed by Mexico (11 per cent) where expanded SX-EW capacity contributed to refined production growth. However, overall growth was partially offset by a 16 per cent decline in Chile, the second largest refined copper producer, where both primary electrolytic refined production and electro-winning production declined. Production also declined in the third and fourth world leading refined copper producers, namely, Japan (in electrolytic production from concentrates) and in the United States (mainly in electro-winning output). On a regional basis, refined output is estimated to have increased in Asia (4 per cent), in Africa (3 per cent) and in Europe (including Russia) (2 per cent) while declining in the Americas (10 per cent) and in Oceania (11 per cent).

World apparent refined usage is estimated to have declined by around 3 per cent in the first four months of 2017. Preliminary data indicates that although world ex-China usage might have grown slightly by around 0.5 per cent, growth was more than offset by a 7 per cent decline in Chinese apparent demand. Chinese apparent demand (excluding changes in unreported stocks) declined by 7 per cent because although refined copper production increased by 6.5 per cent, net imports of refined copper declined by 36 per cent. Among other major copper using countries, usage increased in India, Japan and Taiwan but declined in the United States and Germany. On a regional basis, usage is estimated to have declined in all regions: in Africa by 1 per cent, in Asia by 3 per cent (when excluding China, Asia usage increased by 7 per cent), in the Americas by 1 per cent and in Europe by 6 per cent.

Since, copper supply is set to under-perform demand for much of the next half decade. As the global economy departs from several years of stagnation, so too does the outlook for copper pricing. The combination of stronger than expected Chinese demand, a clear lack of visible copper inventory build, an end to cost deflation, and the U.S.-centric reflation story after the Trump election victory has sparked positive price momentum through the latter stages of 2016 and the first half of 2017. Copper is not iron ore, and it is not nearly as easy to find and produce. The current copper price does not support growing supplies, and it appears that some producers have begun to put their collective shovels down. In reality, the world needs another mega-project before 2020, and we just don't have one coming. The major deposits are, for the most part, found. $3.00 per pound will easily bring on plenty of supply, but again, my belief is it will be too late. My guess is that we start to see the shortage become obvious near the end of the first half of 2017. Prices will overshoot and what we saw during the China boom won't be out of the question. Moreover, China's construction contracts have continued a high rate of growth despite their economic slump, as have car sales. A lot of China's recent copper interest may lie in the aluminum vs copper wiring battle. They have been using a lot of the aluminum wire, because it is a very abundant metal with stable pricing running a fraction of that for copper. Thus, I feel that the positivity in the prices is likely to continue of the later half the 2017.